PROJECT GCP/SYR/006/ITA – Phase II “Assistance for Capacity Building through

1. PROJECT GCP/SYR/006/ITA – Phase II “Assistance for Capacity Building through Enhancing Operation of the National Agricultural Policy Center” seminar on Partial equilibrim analysis of the agricultural policies: the case of rice Common Market Organisation in the European Union Piero Conforti - The National Institute of Agricultural Economics, Roma, Italy

2. Introduction The Common Agricultural Policy of the EU is undergoing deep changes, especially concerning market policy provisions that are included in the so called Common Market Organisations (CMOs) INEA was asked by the Italian Minister of Agriculture to study the effects of these changes, and of different options to be negotiated with other EU member States Some of this work has been done with the support of partial equilibrium modelling; this was the case of the CMO for rice.

3. Aim and content of the seminar Aim: show how partial equilibrium analysis can be used in practice for policy analysis, from an example. 1. The rice support regimes, and the Italian position 2. The organisation of the quantitative assessment: different models at different levels of aggregation 3. The type of results obtained 4. Final remarks. Was it worthwhile using quantitative analysis?

4. The CMO for rice Today’s EU market policy for rice includes: • a floor price • a minimum import price, related to the floor price level (a sort of variable import tariff in fact, bound in the GATT URAA94) • a direct support granted per hectare of cultivated land (semi-decoupled) • a maximum area eligible for support

5. The EU market for rice has undergone a severe crisis over the late 1990s. Consumption increase was about 11% between 1995 and 2000, while production increased of about 32% Given the policy setting, this brought about: • an EU average market price decrease of about 30% between 1996 and 1999 • a high accumulation of intervention stocks • in Italy the crisis was particularly severe because • the country is the first rice producer in the EU • pressure on prices was increased by a revaluation of the exchange rate

6. Given this situation, the EU Commission proposed a reform of the CMO for rice aimed at • abolishing the floor price, and substituting it with a subsidy to private storage (at a lower level) • increasing the (semi - decoupled) payment per hectare by almost 20% • making a 10% land set-aside programme mandatory for rice producers • substituting the minimum import price system with a fixed import tariff INEA prepared an ex ante quantitative evaluation of the likely effects of this reform proposal

7. The organisation of the quantitative assessment Before getting involved in any quantitative assessment, we gathered information about the specific features of the industry (farm types, size, location, market organisation, processing). We realised that we needed to understand: • first, the general likely effects of this reform on the EU rice market as a whole; • second, the specific effects of this reform in the Italian rice growing areas.

8. The organisation of the quantitative assessment In order to understand the effect of the reform proposal at the EU level we used the AGLINK model of the OECD This is a world-wide partial equilibrium dynamic model, that represents the most important temperate zone agricultural commodity markets AGLINK is used by the OECD to generate projections on world market trends, and for policy simulation. The model is available to member countries; it includes the EU as a single region

9. The organisation of the quantitative assessment Among the interesting features of AGLINK, there is the inclusion of variables representing intervention stocks for more than one product. • for some products these are treated within “IF - THEN” relations • for other products (e.g. rice), public stocks are empirically related to the ratio of the market price to the floor price. This has no theoretical foundations, but it can provide at least some indication about the direction and the size of public stock changes under different options

10. The organisation of the quantitative assessment Another interesting features of AGLINK is that it provides an approximated representation of the semi -decopuled character of the direct payments: • the model assumes that farmers decide land allocation first, and then the yield; • this means that there are two separate equations that determine land allocated to a crop and its yield in one year • semi-decoupled payments affect the first, and not the second. Once more, this is an empirical simplified approach

11. The organisation of the quantitative assessment In order to understand the effect of the reform proposal in Italian rice growing areas we used a model called Positive Mathematical Programming (PMP); This is a supply model, based on mathematical programming, that indicates how land allocation changes after a change in relative crop prices. The PMP works with exogenous prices. This was run on Italian provinces, with farm level data (FADN).

12. The organisation of the quantitative assessment The PMP is conceived as a micro model: it is aimed at representing farmer’s decision making rather than the aggregate behaviour. It is a short run model, that assumes that farmer choose a land allocation pattern among the presently available alternative crops, on the basis of their relative profitability. It provides information on • supply response • changes in total farming revenues • changes in farmers gross margins • changes in land shadow prices

13. Summing up the general idea of the quantitative assessment was • understanding the likely effects of the reform proposal on average EU market prices with AGLINK first; • and then to use this information as an exogenous datum in the PMP model for Italian provinces, to understand the supply reaction in each of them • a “small region” assumption was thus needed emphasis was more on prices, supply and stocks reactions than on welfare…

14. The kind of results obtained: AGLINK Rice Indica Rice

15. The kind of results obtained: AGLINK Given these results we decided to take two hypotheses of price effect of the reform proposal hyp 1: - 15% hyp 2: - 25% These correspond respectivly to the maximum nd the minimum price change generated with AGLINK Thus we plugged these in the PMP framework as exogenous price changes.

16. The kind of results obtained: the PMP

17. Final remarks Was it worthwhile using quantitative analysis? A selected group of stakeholders provided an (informal) validation of the results…. …but obtaining them with quantitative analysis (at least) helped us understanding some basic mechanisms of the market that stakeholders not always realise, both at the EU level and in Italian provinces. Moreover, quantitative assessments can help the political debate, by providing an immediately clear understanding of the consequences of a policy option